Oracle Shareholders Still Think Larry Ellison's Pay Is Too High

That rarity – a second Say on Pay loss – has now afflicted Oracle (NYSE: ORCL) , where around 57% of shareholders voted against executive pay practices at the firm at yesterday's annual meeting. A number of large pension funds, including CalPERS, CalSTRS, CtW Investment Group, Dutch fund PGGM, and the UK's Railpen, all indicated that they had voted against Oracle's pay. In contrast, one of the biggest supporters of executive compensation at the firm is CEO Larry Ellison himself who, since he owns 25% of the company, has no small influence. However, if you take Ellison's votes out of the process, then the protest vote is actually at 76%. This is very close to the level of discontent at last year's meeting.

Ellison's pay did not decline this year, as has been claimed, despite his refusal of a cash bonus. He earned $153 million in 2013, compared to $37 million in the previous year. The widely reported $78 million, supposedly representing a pay cut from $96 million in 2012, is what he might get if the stock price rises according to Oracle's expectations. That $78 million includes an estimated value of $77 million for 7 million stock options he was awarded in July 2012. But it's an estimate. Real 2013 pay includes actual profits on 7.2 million stock options that he exercised during the year.

So, if it's an estimate, Oracle's faltering performance might lead to the stock options he was awarded in 2012 being worth a lot less than $77 million. Doesn't that make this an effective form of performance-related pay? In some instances, the answer would be yes. Except that in Oracle's case, as I explained here, Ellison's 25% ownership stake ties his fortune's to the company's fortunes so closely that the award of any options at all is a waste of shares and shareholder resources.

Testing the compensation committee's resolve

The company has not released, as of this morning, the vote tallies for the directors on the compensation committee. Last year, about a third of votes (or almost half, if you exclude Ellison's shares) voted against them: Bruce Chizen, Naomi Seligman, and George Conrades. While the company has announced that they were reelected with a majority of shares, I would bet that it was hardly a ringing endorsement.

Say on Pay votes are not binding. In other words, companies do not have to listen to shareholder views, which is precisely what Oracle did in response to last year's vote – nothing. Most companies I've looked at who lost a Say on Pay vote, even once, have made sometimes significant changes to executive pay. Only a few have lost a Say on Pay vote twice.

One such company was oil and gas driller Nabors (NYSE: NBR) . Here, changes to executive pay policy will take a while to implement but they became easier when the CEO was forced out. At another, Abercrombie & Fitch (NYSE: ANF) , the over-dominance of the sitting CEO, Michael Jeffries, is preventing any real change in compensation policy. That situation would seem to be echoed at Oracle, where Ellison's dominance, both as a shareholder and a founder, is unquestioned.

No shareholder, even those voting against his pay package, would countenance Ellison's removal from his post. That would damage the company's fortunes significantly and is in no one's interest. But, despite the dominant CEO, directors are supposed to act independently and represent shareholders' views. In this case, these views have been very clearly expressed. If they continue to be ignored, then directors are not doing their job and should be fired.

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